Paul Krugman Understands That Voodoo Is Red (Ink) Rather Than Black Magic

31 Dec 2010

Posted by Stan Collender

Paul Krugman's column in today's New York Times, which discusses many of the themes I've been posting about lately, is right on the money in every sense of that phrase.

Here's the column in its entirety.

The New VoodooBy PAUL KRUGMAN

Hypocrisy never goes out of style, but, even so, 2010 was something special. For it was the year of budget doubletalk — the year of arsonists posing as firemen, of people railing against deficits while doing everything they could to make those deficits bigger.

And I don’t just mean politicians. Did you notice the U-turn many political commentators and other Serious People made when the Obama-McConnell tax-cut deal was announced? One day deficits were the great evil and we needed fiscal austerity now now now, never mind the state of the economy. The next day $800 billion in debt-financed tax cuts, with the prospect of more to come, was the greatest thing since sliced bread, a triumph of bipartisanship.

Still, it was the politicians — and, yes, that mainly meant Republicans — who took the lead on the hypocrisy front.

In the first half of 2010, impassioned speeches denouncing federal red ink were the G.O.P. norm. And concerns about the deficit were the stated reason for Republican opposition to extension of unemployment benefits, or for that matter any proposal to help Americans cope with economic hardship.

But the tone changed during the summer, as B-day — the day when the Bush tax breaks for the wealthy were scheduled to expire — began to approach. My nomination for headline of the year comes from the newspaper Roll Call, on July 18: “McConnell Blasts Deficit Spending, Urges Extension of Tax Cuts.”

How did Republican leaders reconcile their purported deep concern about budget deficits with their advocacy of large tax cuts? Was it that old voodoo economics — the belief, refuted by study after study, that tax cuts pay for themselves — making a comeback? No, it was something new and worse.

To be sure, there were renewed claims that tax cuts lead to higher revenue. But 2010 marked the emergence of a new, even more profound level of magical thinking: the belief that deficits created by tax cuts just don’t matter. For example, Senator Jon Kyl of Arizona — who had denounced President Obama for running deficits — declared that “you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans.”

It’s an easy position to ridicule. After all, if you never have to offset the cost of tax cuts, why not just eliminate taxes altogether? But the joke’s on us because while this kind of magical thinking may not yet be the law of the land, it’s about to become part of the rules governing legislation in the House of Representatives.

As the Center on Budget and Policy Priorities points out, the incoming House majority plans to make changes in the “pay-as-you-go” rules — rules that are supposed to enforce responsible budgeting — that effectively implement Mr. Kyl’s principle. Spending increases will have to be offset, but revenue losses from tax cuts won’t. Oh, and revenue increases, even if they come from the elimination of tax loopholes, won’t count either: any spending increase must be offset by spending cuts elsewhere; it can’t be paid for with additional taxes.

So if taxes don’t matter, does the incoming majority have a realistic plan to cut spending? Of course not. Republicans say that they want to cut $100 billion in spending, which is itself small change in a $3.6 trillion federal budget. But they also say that defense, Medicare and Social Security — all the big-ticket items — are off the table. So they’re talking about a 20 percent cut in what’s left, which includes things like running the judicial system and operating the Centers for Disease Control and Prevention; they have offered no specifics about where the cuts will fall.

How will this all end? I have seen the future, and it’s on Long Island, where I grew up.

Nassau County — the part of Long Island that directly abuts New York City — is one of the wealthiest counties in America and has an unemployment rate well below the national average. So it should be weathering the economic storm better than most places.

But a year ago, in one of the first major Tea Party victories, the county elected a new executive who railed against budget deficits and promised both to cut taxes and to balance the budget. The tax cuts happened; the promised spending cuts didn’t. And now the county is in fiscal crisis.

Now the federal government has a lot more flexibility than a county government: it needn’t, and shouldn’t, balance its budget each year. The deficits of the past two years have actually been a good thing, helping to support the economy in the aftermath of the 2008 financial crisis.

But Nassau County shows how easily responsible government can collapse in this country, now that one of our major parties believes in budget magic. All it takes is disgruntled voters who don’t know what’s at stake — and we have plenty of those. Banana republic, here we come.

So what if he was calling for huge stimulus on top of what we did - all "we" did was possibly stop the economy from falling apart, or at least postpone it. It isn't recovering. It isn't strengthening. At least not for the People.

Additional stimulus may have provided us with more of a "hockey stick" growth as opposed to the near-flat line we have. We'll never know. We do know that what was done wasn't enough.

Krugman called for additional stimulus because it was plain as day that the stimulus that passed was not sufficiently large to close the output gap.

As for "the economy seems to be recovering" - are you serious? The unemployment rate is 9.8% and has been over 9% for 19 months now. 3 of the past 5 quarters have shown GDP growth far below potential and below the level needed just to keep the unemployment rate from rising. Case-Shiller indicates that home prices appear to have resumed their slide over the Summer. Where exactly is the recovery? The stock market?

...with a pathetic multiplier. Not all stimulus is created equal--dollar for dollar, most tax cuts don't do a lot to stimulate the economy. The payroll tax cut is decent and the unemployment extension is very good; the rest is mediocre.

The administration's own math suggests this stimulus, while better than nothing, won't do more than shave a few fractions of a point off the unemployment rate.

If cutting taxes were the answer to all our economic woes, then we should be enjoying economic prosperity from the Bush tax cuts. Instead, we are still mired in the great recession. Just because one doesn't agree with the failed economic policies of the past, doesn't make one political. What is good for the republicans and their financal supporters, isn't necessarity good for the rest of us.

Posted by Bloomer on Jan 3rd, 2011 at 12:19 am.

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